N. Selvaradjalou Chetty and Co. (India), Madras vs Commissioner of Income Tax, Madras

Srinivasan, J.

(1) The question that stands referred to us is.

Whether the legal expenses of Rs. 3900 and Rs. 6480 were allowable under the provisions of S. 10(2)(xv) of the Indian Income Tax Act?

The facts leading to this question are these. One Selvarajulu Chetti was carrying on a stevedoring business in Madras. He died in 1938 leaving

Padmini as his only surviving daughter. Thereafter certain relations of this Selvarajulu Chetti carried on the business purporting to claim it, the

business, to be a joint family business. Matters went on thus. In 1948, a deed of partnership came into existence and Padmini, the daughter of

Selvarajulu Chetti, was taken as a partner. Subsequently, however, Padmini instituted a suit in the High Court claiming that the business belonged

solely to Selvarajulu Chetti as his self-acquired property and that the other so-called partners were not entitled to any interest in that business and

sought a declaration that she was solely entitled to the business. There were other reliefs sought in that suit, such as to recover a sum of Rs.

1,32,000 received on life insurance policies of Selvarajulu Chetti, and jewels belonging to him, his wife and Padmini. The trial Judge upheld the

claim of Padmini in so far as the moveables are concerned. The business asset was however held to belong to the Hindu undivided family. We may

mention at this state that on appeal from that decision, a Bench of this court held in favour of Padmini even with regard to the business assets.

(2) It was the expenses of the defendants in that suit that is the subject mater of the present reference.

(3) The Income Tax Officer allowed these expenses in the assessment year 1958-59. But the Commissioner of Income Tax after notice to the

parties, held that the legal expenses were incurred in a dispute regarding the title to the business itself and was not for the protection of the

business. he also held that the dispute was between the partners and that it covered not only the business asset by other non-business assets as

well. According to him, the expenditure could not be said to have been incurred wholly and exclusively for the purpose of the business. This order

of the Commissioner was with regard to the assessment year 1959-60. For the assessment year 1959-69, the Income Tax Officer declined to

grant the allowance. The further appeals to the Appellate Assistant Commissioner and the Tribunal also failed.

(4) On the application of the assessee, the question set out above stands referred to this court.

(5) Shortly stated, the dispute in the suit was to declare the title of the business in its entirety, whether it vested in A or in B. Would the expenditure

incurred in relation to such a suit by one that could be described as having been incurred wholly and exclusively for the purpose of the business?

Sri S. Narayanaswami, learned counsel for the petitioner, argues that if the business has to establish its title to an asset or litigate in order to secure

its maintenance, it would be properly allowable under S. 10(2)(xv). Equally, he argues, when the title to the entire business is in issue it is the same

as saying that the title to each and everyone of the assets of the business in question. Therefore, he claims that the expenditure must be one which

would come within the scope of the relevant clause of S. 10(2). It seems to us that there is a fundamental fallacy in the argument. What we

conceive to be the real scope of the allowance contemplated to the relevant provision is that the business regarded as an entry purpose of

protecting itself against any inroads made upon its productive capacity ownership of assets or the like. Where two disputing claimants claim title to

the business as a whole, it does not appear to us that any such dispute would involve expended for the purpose of the business. The expenditure is

really incurred for and on behalf of the contending parties, each seeking to establish title to the entirely of the business protects itself against any

claims to its prejudice or which would jeopardise its profit making ability. This point of distinction seems to us to be substantial and that is virtually

overlooked by the learned counsel inputting forward this argument.

(6) In support of his argument, learned counsel has referred to certain decisions none of which to our minds lends any real support of the

propositions which he advance. The case Southern v. Borax Consolidated Ltd. (1941) 23 tax Cas 597 is hardly in point. That was a case where a

company had acquired land in America for the purpose of its business. The title of the company to the land was disputed in American courts and in

defending the action the company incurred expenses. This expenditure was held to be wholly and exclusively laid out by the company for the

purpose of its trade. We are really unable to see what parallel there is between the facts of that decision and the present one. That was a case

where the company as an entity sought to maintain its right to certain assets, and the legal expenses incurred did not create any new asset at all. If a

sum of money is expended for the acquisition or the improvement of a fixed capital asset, it is undoubtedly attributable to capital. But if there is no

change in the fixed capital asset, then the expenditure is properly attributable to revenue. The argument of the learned counsel in the present case

that what the assessee was doing was to maintain its title to each and every one of the assets, and therefore, the expenditure is deductible under S.

10(2)(xv). cannot possibly be accepted.

In the Commissioners of Income Tax Vs. Raman and Raman Ltd., the assessee company entered into an agreement to purchase certain buses

along with th permits connected with them. A third party filed a suit claiming title to the buses and seeking to recover possession of them. The

parties went from court of court with varying success. Finally, the company failed in the civil courts to establish its title. On the question whether the

expenditure incurred in relation to these proceedings was deducible under S. 10(2)(xv), this court held that the expenditure was incurred for the

purpose of retaining a capital asset of the company, and there was no improvement to its capital asset by reason of the litigation. Here again, it will

be noticed that it was the company fighting for its own rights. In G. Veerappa Pillai Vs. Commissioner of Income Tax, Madras, a similar question

arose with regard to the litigation expenditure incurred by the assessee in seeking to establish his title to certain buses and to recover possession

from the person who had agreed to sell them to the assessee. Here again, the right to deduction was upheld and it was pointed out that for the

purpose of S. 10(2)(xv), it did not matter whether the assessee figured as a plaintiff or defendant and equally whether the succeeded or failed in the

litigation.

In Transport Company Limited Vs. Commissioner of Income Tax, Madras, this court pointed out the distinction between expenses of a litigation to

maintain an existing title and one where the purpose was to acquire or cure a defect in the assesee''s title. In the former, the expenditure would be

of a revenue nature and in the latter it would be of a capital nature. None of these decisions cited by the learned counsel for the assessee deals with

a case like the present where the dispute is not between the company, on the one hand, an another person claiming title adversely to it, on the

other, but between the members of a company or members of the partnership, each one claiming exclusive title to the entirety of the business and

of the assets it comprises of. That is a position which will not come within the ratio of any of these decisions, and a dispute of that nature which is in

the individual interest of one of the partners of the firm, cannot be equated to one in which the interests of the business are affected.

(7) Mr. Ranganathan, learned counsel for the department, has referred to Morgan v. Tate and Lyle Ltd. 1954 26 ITR 195 . The actual question

for decision in that case was whether an expenditure incurred by the company in conducting a propaganda to oppose the threatened nationalisation

of the industry was an admissible deduction. It was held that the object of the expenditure was to preserve the assets of the company from seizure

and to enable it to carry on and earn profits, and that being so, the expenditure was an admissible deduction. There are certain observations in this

judgment which bring out the distinction between a case where the interests of the company or the business are affected and none where the

ownership of the business is in question and the nature of the expenditure incurred in litigation relevant to these two aspects. Lord Keith observed

at page 224.

It is necessary, in my opinion, to distinguish between a threat to the assets of a business and a threat to the right of the owner of the business and

assets to carry on the business. The assets of the business may be threatened in a variety of ways. They may be said to be under a constant threat

of loss of fire or burglary or peril of the sea of other risk, varying with the nature of the business or asset; of they may come under a more direct

threat by challenge of the right to use or employ them in the business. Such threats leave the question of ownership of the business unaffected. The

owners of the assets may be able to continue in business and preserve the goodwill, even if the threat is realised. On the other hand, it may be that

the loss of the assets will so cripple him as to put him out of the business......Where the threat is to the ownership of the business, the positions

different..........There is a plain difference between these two cases. Where loss of or damage to an asset results, there is loss or damage to the

trade as such. Where loss of ownership results, there is no necessary loss or damage to the trade at all. The trade may go on as before in the hands

of the successful challenger with the old assets or may, for a variety of possible reasons, come to an end. Income Tax legislation has at different

times made different provisions for cases of discontinuance of trade or succession to a trade. These are no doubt provisions relating to the manner

or measure of assessment, but as they are a clear recognition of the common commercial experience of a business, continuing through several

hands, they indicate that ''the trade'' when used in the statutes, has to be construed as an entity in itself....................

These observations make it clear that whether the ownership of the business is in the hands of A or B, it makes no difference to the business, and it

is not a case where the business itself or any of its assets is jeopardised, so that an expenditure incurred in maintaining that asset can be said to be a

revenue expenditure. It accordingly seems abundantly clear to us that in the present case, the expenditure was not one which was incurred wholly

or exclusively for the purpose of the business.

(8) The question is answered in the negative and against the assess, which will pay the costs of the department. Counsel''s fee Rs. 250.

(9) Question answered in negative.